MOUNTAIN OF DEBT: Rising debt may be next crisis
On Friday July 3, 2009, 5:02 pm EDT

.WASHINGTON (AP) -- The Founding Fathers left one legacy not celebrated on Independence Day but which affects us all. It's the national debt.

The country first got into debt to help pay for the Revolutionary War. Growing ever since, the debt stands today at a staggering $11.5 trillion -- equivalent to over $37,000 for each and every American. And it's expanding by over $1 trillion a year.

The mountain of debt easily could become the next full-fledged economic crisis without firm action from Washington, economists of all stripes warn.

Higher taxes, or reduced federal benefits and services -- or a combination of both -- may be the inevitable consequences.

The debt is complicating efforts by President Barack Obama and Congress to cope with the worst recession in decades as stimulus and bailout spending combine with lower tax revenues to widen the gap.

Interest payments on the debt alone cost $452 billion last year -- the largest federal spending category after Medicare-Medicaid, Social Security and defense. It's quickly crowding out all other government spending. And the Treasury is finding it harder to find new lenders.

The United States went into the red the first time in 1790 when it assumed $75 million in the war debts of the Continental Congress.

Alexander Hamilton, the first treasury secretary, said, "A national debt, if not excessive, will be to us a national blessing."

Some blessing.

Since then, the nation has only been free of debt once, in 1834-1835.

The national debt has expanded during times of war and usually contracted in times of peace, while staying on a generally upward trajectory. Over the past several decades, it has climbed sharply -- except for a respite from 1998 to 2000, when there were annual budget surpluses, reflecting in large part what turned out to be an overheated economy.

The debt soared with the wars in Iraq and Afghanistan and economic stimulus spending under President George W. Bush and now Obama.

The odometer-style "debt clock" near Times Square -- put in place in 1989 when the debt was a mere $2.7 trillion -- ran out of numbers and had to be shut down when the debt surged past $10 trillion in 2008.

The clock has since been refurbished so higher numbers fit. There are several debt clocks on Web sites maintained by public interest groups that let you watch hundreds, thousands, millions zip by in a matter of seconds.

The debt gap is "something that keeps me awake at night," Obama says.

He pledged to cut the budget "deficit" roughly in half by the end of his first term. But "deficit" just means the difference between government receipts and spending in a single budget year.

This year's deficit is now estimated at about $1.85 trillion.

Deficits don't reflect holdover indebtedness from previous years. Some spending items -- such as emergency appropriations bills and receipts in the Social Security program -- aren't included, either, although they are part of the national debt.

The national debt is a broader, and more telling, way to look at the government's balance sheets than glancing at deficits.

According to the Treasury Department, which updates the number "to the penny" every few days, the national debt was $11,518,472,742,288 on Wednesday.

The overall debt is now slightly over 80 percent of the annual output of the entire U.S. economy, as measured by the gross domestic product.

By historical standards, it's not proportionately as high as during World War II, when it briefly rose to 120 percent of GDP. But it's still a huge liability.

Also, the United States is not the only nation struggling under a huge national debt. Among major countries, Japan, Italy, India, France, Germany and Canada have comparable debts as percentages of their GDPs.

Where does the government borrow all this money from?

The debt is largely financed by the sale of Treasury bonds and bills. Even today, amid global economic turmoil, those still are seen as one of the world's safest investments.

That's one of the rare upsides of U.S. government borrowing.

Treasury securities are suitable for individual investors and popular with other countries, especially China, Japan and the Persian Gulf oil exporters, the three top foreign holders of U.S. debt.

But as the U.S. spends trillions to stabilize the recession-wracked economy, helping to force down the value of the dollar, the securities become less attractive as investments. Some major foreign lenders are already paring back on their purchases of U.S. bonds and other securities.

And if major holders of U.S. debt were to flee, it would send shock waves through the global economy -- and sharply force up U.S. interest rates.

As time goes by, demographics suggest things will get worse before they get better, even after the recession ends, as more baby boomers retire and begin collecting Social Security and Medicare benefits.

While the president remains personally popular, polls show there is rising public concern over his handling of the economy and the government's mushrooming debt -- and what it might mean for future generations.

If things can't be turned around, including establishing a more efficient health care system, "We are on an utterly unsustainable fiscal course," said the White House budget director, Peter Orszag.

Some budget-restraint activists claim even the debt understates the nation's true liabilities.

The Peter G. Peterson Foundation, established by a former commerce secretary and investment banker, argues that the $11.4 trillion debt figures does not take into account roughly $45 trillion in unlisted liabilities and unfunded retirement and health care commitments.

That would put the nation's full obligations at $56 trillion, or roughly $184,000 per American, according to this calculation.

The thing about US debt, is that even if it touches a 100 trillion dollars, there would be no cause for worry. The US debt has grown this large simply because US$ is the primary exchange currency in the world. And as long as it remains the primary currency, US debt will continue to rise in pure dollar terms. The upside is that the US controls the value of the US$, and consequently, its own debt. As long as the US$ does not fall or rise in value too rapidly, this arrangement could essentially continue on forever. The rest of the world will continue to finance US consumption, and as a result would keep growing. Win-win.

The thing about US debt, is that even if it touches a 100 trillion dollars, there would be no cause for worry. The US debt has grown this large simply because US$ is the primary exchange currency in the world. And as long as it remains the primary currency, US debt will continue to rise in pure dollar terms. The upside is that the US controls the value of the US$, and consequently, its own debt. As long as the US$ does not fall or rise in value too rapidly, this arrangement could essentially continue on forever. The rest of the world will continue to finance US consumption, and as a result would keep growing. Win-win.

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This arrangement would be nice as long as you don't try to cash in the debt that you owe as the Chinese are finding out no buyers and no market for it.

This arrangement would be nice as long as you don't try to cash in the debt that you owe as the Chinese are finding out no buyers and no market for it.

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Maybe not right now, but in a few months/years when this crisis blows over, everything will be back to normal. Unless talk of a "super-sovereign" currency at the IMF progresses any further. In any case, as long as the American economy doesn't suffer a shock, the rest of the world should be OK. Thankfully, due to globalisation, everyone's economic future is interlinked.

Maybe not right now, but in a few months/years when this crisis blows over, everything will be back to normal. Unless talk of a "super-sovereign" currency at the IMF progresses any further. In any case, as long as the American economy doesn't suffer a shock, the rest of the world should be OK. Thankfully, due to globalisation, everyone's economic future is interlinked.

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true but the crisis is still to come with central banks worldwide dumping the dollar it will build into a panic to be the first one out the door and trigger a collapse in many economies.

true but the crisis is still to come with central banks worldwide dumping the dollar it will build into a panic to be the first one out the door and trigger a collapse in many economies.

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I really don't think so. If they dump the dollar, what currency will they replace it with? The Euro? The Yen? The Euro is not as easily convertible and accepted worldwide as the dollar, and as for the yen, no one will want to bet their future on the Japanese economy, which has actually been shrinking for the past many years. There is no alternative to the $ right now, so countries will either stick to it, or at the most, change the proportion of various currencies in their reserve basket, like India is planning to do.

The weight of the dollar in the basket of currencies that helps set the rate of India's partially convertible rupee currency INR=IN may be reduced, a senior Indian government adviser said on Friday.

Suresh Tendulkar, chairman of the prime minister's economic advisory council, said the Indian central bank was responsible for any change but he believed such a move was quite possible.

"The basket may undergo change. That's up to the Reserve Bank of India. They have to make a call which is the stability of the foreign exchange," he told reporters on the sidelines of an economics conference in the southern French town of Aix.

"I would not be surprised if they change it," (to reduce the weight of the dollar in the basket) he said.

Up until now, the U.S. dollar had been considered the main reserve currency in India, he said.

"India may change. That is something where no decision has been taken."

China has asked for a debate on a new global reserve currency when leaders from the Group of Eight (G8) meet with the G5 emerging economies next week in Italy, G8 sources told Reuters.

"I think if you look at the global imbalances that were being talked about today between the surpluses and China and Japan and the deficits of the United States, I think that needs to be corrected. That I think is clear," Tendulkar said.

"That essentially would mean that the Chinese yuan and the Japanese yen appreciate. That is the major danger that China is fearing. China is now asking for an international currency because all the reserves are in dollars."
Asked whether the U.S. dollar should be weaker he said: "I think it is necessary ... it should go down."

Tendulkar said countries needed to make a decision about whether the U.S. dollar would continue to be the main reserve currency.

"I think that is something that will have to be decided by consensus with all the countries concerned," he said.

Earlier on Friday in Tokyo, Yoichi Suzuki, director-general of the Japanese foreign ministry's economic affairs bureau, said major countries should support the dollar as the key international currency.

He said Japan thinks it would be difficult for another currency to replace the dollar as the world's reserve currency and is against any move that would unnecessarily weaken the status of the dollar.